Kelly Bullis: Roll 529 unused balance to a Roth IRA

It has turned out to be one of the unexpected success stories of the U.S. Congress. When they created the 529 plan option, it is possible that they didn’t think very many folks would actually take advantage of it.

Now we have a new problem. Many students have enjoyed the thoughtful planning actions of their parents and grandparents, used their 529 funds to go to secondary education and are now finished, with some funds left over in the 529 plan.

Here is an excellent “next step” with that fabulous savings habit that was started, turn it into a Roth IRA.

The SECURE 2.0 law authorizes such a tax-free rollover beginning in 2024.

There are actually two types of 529 plans. The “Pre-paid Tuition Plan” allows parents to lock in today’s cost for education.

How it works, you pay for one year of college now into the plan, purchasing “shares” to spend in later years when actually going to college. (Not all schools accept this, usually only state schools.) It locks in a guarantee of covering cost of education regardless of inflation, etc. (no funds left over after education).

The other type of 529 plan is called the “College Savings Plan” which is just putting funds into some investment tool, hoping to grow the plan enough to keep up with the rising costs of education. The popularity of this approach is getting a better rate of return than the rising cost of education. Taking advantage of aggressive investment strategies. Leaving a potential for left over 529 funds after finished with education.

There are contribution limits to a 529 plan. In 2023, $17,000 a year ($34,000 for joint gifts by a married couple). There is a quirk in the tax law that allows you to front load a 529 plan by putting up an equivalent of five years of the annual limit with no gift tax consequences. It gets the funds earning income quicker, which can potentially grow to a larger amount by the time the child is old enough to become a student.

In the SECURE 2.0 act, a 529 plan account owner can roll over up to $35,000 in unused funds to a ROTH IRA without owing any federal income tax. This provision starts in 2024. One final catch, the 529 plan must have been open for at least 15 years. So late comers won’t qualify, right away, but if you wait until that plan is at least 15 years old, then you can do the Roth IRA conversion.

What a great way to get that graduated child into the habit of saving for retirement. By front loading a Roth IRA, they can be encouraged to continue making the maximum contribution to their new Roth IRA for the rest of their working years. When they retire, they will have a huge non-taxable retirement account to use.

Have you heard? Prov 24:27 says, “Prepare your work outside, and get your fields ready. Afterward, build your house.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.